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HomeMy WebLinkAboutResolutions - 1974.06.20 - 15150June 20, 1974 MISC. RES, 6736 BY: FINANCE COMMITTEE- Fred D. Hcughten, Chairman IN RE: OPPOSITION TO VERMONT PLAN TO THE OAKLAND COUNTY BOARD OF COMMISSIONERS Mr. Chairman, Ladies & Gentlemen: WHEREAS, the Michigan State Association of Counties has requested comment on the "Vermont Plan" on municipal bonding (copy attached), and loans in general; and WHEREAS, your Committee has received a staff recommendation to oppose said ''Vermont Plan"; and WHEREAS, your Committee concurs in said recommendation, NOW THEREFORE BE IT RESOLVED that the Oakland County Board of Commissioners hereby opposes the "Vermont Municipal Bond Bank Plan" (copy attached hereto); and that the Michigan Association of Counties be so notified. BE IT FURTHER RESOLVED that the Board of Auditors be, and they are hereby, authorized to complete the general bond questionnaire and forward same to the Michigan Association of Counties. The Finance Committee, by Fred D. Houghten, Chairman, moves the adoption of the Foregoing resolution. FINANCE COMMITTEE Fred D. Hcu ghten, Chairman WEST LEAWEE STREET LAN:'.3!NG, 1VUCHIGAN 48933 517/372-5374 April ij, 1974 , - 4 1 n • / / ) -• _,,,,,- \_,/ V' e 1 I A.-- .,' 1 .4 f ,_.-- -.., ' -, .P7 Y /-4" 7:,•7•.„ „/ /A' j To Chairman, County Boards of From .: A. Barry MoGuire , Executi-Te Director Your YAC staff has been meeting with the Go7ernor's Office of IntrRovrnmental Relations and one of the sl.Coeot matters has been "Boncis" in general. The Vermont plan is in the research mill right now and would this Be ,,o,oa for Michigan County Government? A copy is enclosed. ana we would a7)preciate your revi ,',r.1 along with the other m.,o,Tfce -?Ts of your Board. It would be greatly acpreoiated if you woula have the followin information ocmpletad and return to our office. Also your coments on the "Vermont Plan". Thing,you in aavarce. l. Does your County have any problem in r:12.6ting Bonds? a. Types having marketing problem. • — County's Credit Rating 3. Number of Bond issues you might Be contemplating and ty -oE-.,. 4, Under i-million. B. 1,0e 1 million. o. Over I million. Again your -eo7)eratioa is greatly -y-).70-,?Hat'7:-.1.” 2 . CHAIR MAN FT: ANK H. O.S. VICE CHAIRMAN CUMMINGS F.:ICHA RD A. I,IYETTE FRANCIS C. LEONARD ?"- e• VERMONT MUNICIPAL BOND DANK OFFICE OF THE 5TATE. 133 STATE ST:.-T MONTPELIER., VERMONT 0I3C-.2 SECRETARY AN TREASO HER LEO K. HICKEY ADVANTAG 7 S.TO LOCAL GOVERN',FNTS TFRflUGH UTILIZATION OF THE BOND BANK CONCEPT The direct saleof their bonds to a municipal bond bank would result in lower interest cost rates to many governmental units. This is one of the m.aior attractions of a bend ban1c.. Lower interest cost rates are possible because of the size of the bond issue offered by the bond bank and the higher credit rating that a state bond bank issue would receive. Obviously, a state sponsored $20,000,000 bond bank issue would create more investor interest than a $1,000,000 bond issue of a •local governmental unit. . Over .30 new bond issues are offered at advertised sale to the municipal bond market every week. In this arena where bond issuers . compete for the investment dollar, the issues that received the -most favorable interest rates arc those issues that are large and weil • - Publicized by the issuer and its financial advisor. In facL many major municipal bond dealer firms have a policy of not bidding on issues under $5,000,000 in principal amount while still others in - lesser nuber will not bid on an issue if it is not at $10,000,000 . in size. The conseeuence of these policies is that the small bond issues (even those with good credit ratings) suffer most because of (1) the lack of enough bonds in a maturity to sustain attention in the secondary market and (2) the press of time on municipal bond dealers to handle the more profitable larger issues. - In addition to the projected savings in interest costs that a - bond bank might save there are several other advantages eea.ng which are the following: . . . . 1. The overhead costs per bond to the local governmenal unit for its local bond issue can be reduced considerably by selling the local bond .1c:cue directly to the bond bank. In this instanco the .governmental unit will save - the cost of advertising the issue for sale, the cost of printing a representative official statement or - • offering circular, much of the cost of an out-of-state delivery to the purchaser, the cost of printing the bonds (since the transaction can be completed with one typewritten, fully executed bond for the total amount of the local bond, issue.) . Major bond Luyers such as insurance companies and commercial -2- banks, usually prefer to purchase bond issues that are large in total dollar amounts because larger issues are generally easier to • trade. Thus, bond issues of smaller municipalities are less attrac- tive to investors. Many institutional investors refuse to even • consider blocks of less than 50 to 100 bonds of the same maturity because of limited marketability. • It should be noted also that the processing costs Of municipal bond dealers for reviewing the merits of a small bond issue-.are nearly the same as they are for a large bond issue, thus it is in- . evitable that bond dealers will have to work for larger per bond - profit spreads on small issues than on large issues to cover the cost of this financial review.- - 3. Small localgovernments usually find it difficult and ex7 pensive to employ the experienced legal and financial advisors - necessary to assist them in the issuance of their bonds and their-. . own staff cannot be expected to be familiar with the intricacies ' of current marketing practices and the operation of the national bond -- markets. These local governmental units could receive such techni- cal assistance from the staff of a bond bank since they would deal . . 4. A major advantage that enures toa governmental unit. which. • sells its bond issue directly to a bond bank is the fact that the bond bank's bands can be sold with a 10-year call feature. - -• 5. By selling its bond issue directly to a bond bank the local . governmental unit does not have to go to the trouble and expense (some- times considerable) of submitting its proposed bond issue(s) to • • the credit rating - agencies. , Both. Moody's Investors Service and Standard & Poor's Corporation • have a $600- minimum charge for assign- ing a credit rating to 4 bond issue of any size; • 6. Interestingly enough it is not only those 'governmental - units that have a lower credit rating en their bond issue's that are interested in participating in the bond bank program. A case in '- point occurs with respect to the seCond issue of the Vermont Munici- pal Bond Bank which was sold in January of 1972. The Vermont Munici- pal Bond Bank was rated "Aa" and "AA" by Moody's Investor Service and. . Standard & Poor's Corporation respectively; however, the City of •• . Montpelier, Vermont which has an Aaa rating by Moody's Investor Servic (superior to the Vermont Municipal Bond Bank's credit rating) elected to include its $400,000 bond issue in the package of those issues sold. to the Vermont Municipal Bond Bank in January of 1972, even though • Secretary & Treasurer explained to the Montpelier officials that they might obtain a lower rate of interest by selling the Mentpelier issue on their. own. The Montpelier officials reasoned, that even if they she fare slightly better on their own. (there is however some doubt of this since the first bond bank issue was distributed in about 30 - states and enjoyed an excellent after market) they would save more in issuance costs than they would lose in interest cost. The issuance costs, saved would include, among others, the printing of the bonds, • only with the bank.. only with the bank. -3- advertising for bids', the printing of the official statement and notice of sale, rating services' fees for assignment of bond credit ratings and travel expenses for t]:eir bond closing. It is pointed out that the shortcomings in the municipal bond bank concept although they are few in number compared to the advan- tages of the same are discussed in the paragraphs below: . 1. The state is obligated, morally if not legally, to keep the reserve fund at the proper level and to insure that the principal and interest on the .bond .bank's bonds are retired as they mature. It is recognized that some form of additional security is necessary. for the successful performance of any municipal finance agency, such . as a bond bank.- If none were present, the bonds of the bond bank. would not be much stronger than the weakest participating governmental unit owing money to the bond bank and the improved saleability and lower interest cost rates to governmental units would not be available. Bond counsel for the Vermont Municipal Bond Bank has rendered an opinion to the effect that the State, by its General Assembly, is legally authorized, but not legally obligated, to appropriate annually - such sum as shall have been certified by the Chairman of the bond bank to the Governor or the Governor-elect as is necessary to restore the Reserve Fund to an amount equal to the amount equal to required - debt service reserve, and upon the making- of such appropriations in accordance with the enabling act there shall_be_paid to the Vermont Municipal Bond Bank for deposit in the Reserve Fund the amounts appro- priated. The disadvantages here is that if the General Assembly (in the case of .Vermont and the .State Legislature' in other. states) takes the appropriate action in one year, there is no guarantee that such action would be taken in succeeding years. The bond bank bonds are not general obligations of the -state but the legislature is enpowered, though not required, to make up any deficiency in the debt service reserve fund. Despite this lack of legal obligation, the general • concensus in the investment community is that the legislative intent - to back up the bonds is clear, and that any Legislature would do this • to show good faith and protect its standing in the bond investment community. . _ 2. Some observers felt that local governmental units might be required to deal exclusively with the bond- bank. — . . . _ - • • - No such requirement appears in the .Vermont Municipal Bond Bank Act. All local governmental units are free to sell their bond issues to the bond. bank or to sell them on the open market if they so desire. • 3. It is presumed that a bond- bank would result in Increased . state fiscal control. Since the use of the. bond bank would he optional with local gov- ernmental units, it would seem that a bond bank would improve financing: practices by local governments without destroying existing balances of power. -4- 4. Many . bond dealers who offer a full line of investment bak- -. ing and marketing services have privately expres s ed a high opinion of the bond bank concept but thore are a certain number of bond dealers that derive a very large percentage of total firm earningsfrom pro- viding financial services to governmental units and they are fearful that the establishment of a bond bank will.be an encroachment on their earning capabilities.. While the earnings prospects for certain bond dealers may be dimmed by virtue of having their clients, the governmental units, sell their issues directly to. the bond bank there will still be a certain amount of financial consulting work for these bond dealers.- It is an old adage that you cannot stop progress but you can change your style and bide along very well with it In this --instance I believe that :e concerned bond dealers will find new ways to offer their services and/ or theY'.will.put more emphasis in.other services or merchandising lines Certa'inly the bond bank's time has come and its efficiency as a viable form of munitipal financing will not be denied. _ A' #6736 • June 20, 1974 Moved by Houghten supported b y Qiin the resolution be adopted A sufficient majority having voted therefor, the resolution was adopted. STATE OF MICHIGAN) COUNTY OF OAKLAND) I, Lynn D. Allen, Clerk of the County of Oakland and having a seal, do hereby certify that I have compared the annexed copy of Eae.sp.1:1.t.ion !67.,6.p.,dopted.bythe.Board .of .Commissioners . at ... 6 • 6 • IEI june 20, 1974 meeting. ..... ..... ...... .•. with the original record thereof now remaining in my office, and that it is a true and correct transcript therefrom, and of the whole thereof. In Testimony Whereof, I have hereunto set my hand and affixed the seal of said County at Pontiac, Michigan this ...... ... Lynn D. Allen ...... ....... ..... ....Clerk By.... ..... ................ ....Deputy Clerk